Employee Stock Ownership Plans (“ESOPs”)

When an ESOP strategy is chosen in a business transition, our approach for structuring, implementing and maintaining an ESOP focuses on many factors. Balancing the interests of the owners, the company and its employees to create sustainable employee ownership outcomes while keeping a company locally owned and operated is our goal.

Corporate Capital Resources offers consulting services to coordinate governance and administration efforts by the Board of Directors, human resource area, finance personnel, the Trustees, legal counsel and other professionals serving the ESOP. Efforts are focused on operating the ESOP in compliance with all laws and regulations in the best interest of ESOP plan participants while continuing to meet corporate goals and objectives.

What is an ESOP?

  • Qualified retirement plan
    • Non-discriminatory
    • Tax deductible cash or stock contributions
    • Discretionary contribution set by the Board of Directors
      • Allocable to eligible employees
      • Based on a formula including compensation
      • Statutory limitations
  • Private market for stock
    • Only the highest and best class of stock
    • Current outstanding shares
    • Newly issued shares

Feasibility

  • Sponsor can only be an S or C Corporation
  • Trustees are the legal owners of the stock
    • Vote pass through to participants for defined major events
    • Can sell in stages or sell 100% of a business
  • Coordinated Strategy
  • Characteristics for success
    • Desire to remain locally owned and operated
    • Available financing
      • Bank lending
      • Seller notes
      • Retained earnings loaned to ESOP
      • Previously contributed ESOP cash
    • Profits and financial strength
    • Sufficient employees and payroll
    • Stock available for purchase
    • Management buy- in
      • Understand complexities
      • Willingness to manage cash and stock flows
      • Support for an employee ownership culture
  • Tax Advantages
    • Tax deductible company contributions
    • Selling owner of a C-Corporation
      • Potential 1042 tax deferred rollover
      • Possible current capital gains treatment
    • Tax exempt earnings for S Corporations
    • Deductible dividends for C Corporations
  • Valuing the privately held company
    • Standards
    • Approach
    • Levels of value (minority, majority)
    • Leveraged vs. non-leveraged
    • Valuation discounting

ESOP Design and Implementation

  • Transaction financing
  • Legal counsel
    • Plan features
    • Plan adoption
    • Transaction documents
    • IRS filings and compliance
  • Corporate governance
    • Composition of Board of Directors
    • Successor management
  • Fiduciary roles
    • Selection of Plan Trustee(s)
    • Employee communications
    • Board fiduciary duties and responsibilities
  • Selecting a professional team of advisors
    • Legal
    • Accounting
    • Consultants
    • Third party administrator (record-keeper)

ESOP Going Forward

  • Compliance
    • Plan recordkeeping and administration
    • Written policies and procedures
    • Internal Revenue Service Regulations
    • Department of Labor Regulations
    • Plan audit (if required)
    • Annual tax return (Form 5500)
    • Annual appraisal
    • Plan amendments
    • Corporate Culture
      • Continued employee meetings
      • Summary Annual Reports (SAR) to employees
      • ESOP Administrative Committee
      • ESOP Communications Committee
      • Board interaction with committees
  • Repurchase Obligation
    • Payments to Plan participants
      • Reason
      • Method
      • Timing
    • How do you measure the future obligations?
      • Participant census
      • Distribution rules
      • Value of employer shares
    • How to fund the obligations
      • Corporate owned life insurance
      • Accumulated pool of cash earnings held on the balance sheet
      • Current cash flow
  • Management of stock and cash flows
    • Funding the ESOP (contributions, C-dividends, S-distributions)
    • Secondary transactions
    • Competition for cash
    • Manage share price